RPT-Fitch Affirms Evergrande at 'BB'; Outlook Stable
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Sept 25 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed China's Evergrande Real Estate Group Limited's (Evergrande) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB' with a Stable Outlook. Fitch has also affirmed Evergrande's foreign-currency senior unsecured rating at 'BB'.
KEY RATING DRIVERS
Growth in line with industry. From January to August 2013, Evergrande achieved contracted sales of CNY64.1bn, with an ASP of CNY6,776 per square meter. These numbers are 27% and 11%, respectively, higher than the levels achieved a year earlier. This growth is in line with the pace at other large homebuilders in China. As a result of the improved sales and selling prices, the company's restricted cash levels have improved significantly to CNY32.9bn at end-June 2013 from CNY18.5bn at end-December 2012. Fitch expects the company to achieve its 2013 contracted sales target of CNY100bn (2012: CNY92.3bn).
Margins likely to stabilise. Fitch expects Evergrande's EBITDA margins to stabilise at slightly over 20% if the ASP improvement in 2013 is maintained. Fitch believes that ASP trends are better indicators of future margin trends given the delay in recognising sales in income statements, and thus has placed less emphasis on the company's slight margin improvement to 20.8% in H113 from 19.2% in 2012. It will be difficult for the company to return to the 25.7% margin achieved in 2011 given the rise in competition and cost base, in line with industry trends.
Largest land bank. Evergrande had the largest land bank among Chinese homebuilders with a total of around 140m square metres at end-December 2012. Its scale and nationwide diversification lowers the risk of individual market volatility. However, as the company focuses more on Tier 3 cities and peripheral areas in larger cities compared with its peers, its ASP and margins are typically lower than those of other large nationwide homebuilders who achieved EBITDA margins of 25-35% in 2012.
Urbanisation will drive growth. Evergrande is poised to benefit from the continued urbanisation in China, especially because future growth is likely to focus on selected Tier 3 cities and smaller Tier 2 cities. Evergrande's challenge in realising the full potential of this opportunity is to achieve market leadership in the cities that are likely to grow fastest. This is because Fitch believes that brand recognition and market leadership in individual cities are stronger drivers for pricing power than absolute scale.
Payables higher than peers. As a result of its scale, Evergrande has consistently been able to obtain longer payment terms with its suppliers compared with its peers. Its short-term payables (which includes trade, tax and other payables) to inventories ratio at end H113 was 59% compared with 35-40% at other large homebuilders. This strategy allows Evergrande to be less reliant on debt in its operations. When making peer comparisons, Fitch notes that Evergrande's debt levels may be higher if its payables levels were in line with peers'.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Contracted ASPs decrease from H113 levels
- EBITDA margin sustained below 20%
- Net debt/adjusted inventory sustained over 40% (H113: 28.2%) without improvement in short term payables to inventory ratio.
- Contracted sales/gross debt sustained below 1.25x (2012: 1.53)
- Tighter liquidity position due to a sustained fall in free cash flows, and weaker access to financing channels.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Longer track record of stable growth
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